If NAFTA fails, Canada should reach across the Atlantic to the UK

The future of the North American Free Trade Agreement is looking increasingly uncertain under Donald Trump as president of the United States. In case NAFTA implodes, Armand de Mestral proposes the creation of the Atlantic Free Trade Area between Canada and the United Kingdom, in a framework involving Europe and the US.

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A close look at NAFTA

NAFTA has been in force since 1994. It replaced the 1988 Canada – US FTA for Canada and the United States and brought Mexico into the fold – the first major FTA to link both developed and a developing country. In many respects it has been the model for other FTAs around the world as it covers goods, services and investments in depth as well as a range of non-tariff barriers.

It covers trade in energy goods as well as protecting intellectual property. Among other innovations it included investor-state arbitration in the investment chapter and experiments with dispute settlement arising out of trade remedy disputes. By any standard (except those of Donald Trump) NAFTA has been a remarkable success which has seen trade triple between the USA and Mexico and Canada and increase considerably even between Canada and Mexico. But NAFTA has not been changed in over 25 years; much has happened in that time, including 9/11, and the resulting adoption of no less than five border security agreements, all concluded outside NAFTA.

Now President Donald Trump is calling for the repeal or the renegotiation of NAFTA. Is this the end of a beautiful “free ride” for Canada and Mexico? Should NAFTA be trashed along with globalisation and all its works? Will the wall put an end to close economic relations between the United States and Mexico?

There has been delocalisation as a result of NAFTA, it was after all designed to allow companies to rationalise production. Considerable delocalisation has been from Canada to plants in the United States. Even more has occurred as a result of low wages and subsidies in the Southern United States. Mexico has certainly seen an explosion of industrial investment in the automotive sector, some new by international producers, some resulting from moves by American producers.

All three countries have been affected by automation, robotisation and laser printing production techniques. Currently Canada has kept 13 per cent of global North American automotive production, the United States has kept 57 per cent and Mexico has attracted almost 30 per cent. Overall trade in goods and services has increased three times since 1994. Mexico has become a global producer as well as a producer of goods for the United States. Many goods produced in Mexico, both industrial and agricultural have kept prices low and consumption high in the United States.

Canada and the United States have seen their economies deeply integrated with 75 per cent of Canadian exports going South (down from 85 per cent in 2000). Canada is the major trading partner of 36 American States. One truck moves each way across the Canada – US border every 30 seconds. Rail, truck and air transportation networks, particularly between Canada and the United States, are highly integrated. Canada – US trade alone amounts to $2 billion each day.

What if NAFTA is cancelled?

The fact of the matter is that should all this be restricted or be brought to a halt the economies of all three partners would suffer greatly – perhaps Mexico most but certainly the United States would feel the effects keenly. But President Trump views NAFTA as one more unfair trading agreement by which the United States has agreed to impoverish itself and give up good jobs, and he has called for the repeal or renegotiation of NAFTA. This may only be negotiating bluster but it cannot be ignored.

It is not yet clear how Mexico will respond and the construction of a wall along the border could poison relations with the United States. Canada on the other hand has stayed calm but has made its preparations. A hasty Cabinet shuffle in January 2017 brought in a new Foreign Minister with a strong trade background and the Canadian government has indicated its willingness to review those parts of NAFTA which appear outmoded after 25 years. Canadian ministers have been meeting their new American counterparts and Prime Minister Trudeau is scheduled to meet President Trump today to open discussions. The Canadian approach will be based on affirmation of the continued interest of the United States in maintaining NAFTA and a willingness to discuss problem areas or redundant chapters. Will this strategy succeed or will it be overwhelmed by ideology?

Outright scrapping of NAFTA by the United States would certainly have very serious repercussions for Canada and would interrupt trading relationships which have been carefully nurtured by both governments and by industry for many years. But at this point scrapping NAFTA with Canada is so much against the American interest that it is most unlikely and assurances to this effect have already been given to the Canadian Cabinet by Stephen Schwartzman, Chairman of the president’s Business Council, in early February.

What is far more likely is that the Canada – United States relationship could be seriously disrupted by moves to alter the corporate tax rate, or more serious still to adopt one of many Republican proposals to tax all imported goods and imported inputs in industrial production while forgiving such taxes on all goods exported from the United States. Radical rewriting of the rules of origin for NAFTA goods by the United States would violate NAFTA and the WTO, but it could also have a serious impact, as would a tightening of the Buy American rules if applied to new infrastructure programmes. But at this point it seems that, with some luck and good management, the mutual interest of industry on both sides of the Canada – US border should restrain even the most doctrinaire President from any extreme steps.

The Atlantic Free Trade Area

There is one suggestion, which if taken up by Canada and the United Kingdom, might see a return to constructive engagement on both sides of the Atlantic. This is the idea of an Atlantic Free Trade Area. In the current political climate there are is no easy answers but Canada and the UK would be well served by proactively examining and clarifying their future trading relationship not only with each other but also in a framework involving the EU and the United States. Canada and the UK could make use of the Brexit crisis, not only by planning a mutual FTA should the UK actually leave the EU, but by broadening the scope and ambition of the scheme and pursuing the creation of an agreement covering all of Europe and North America.

An AFTA would be in the interests of all countries concerned. It is well understood that the greatest benefits of free trade are felt by neighbours who share similar economic systems and traditions. AFTA would allow the UK to come in from the cold; it would allow pro-Brexiteers to prove that the UK really has the ambition to become “the great trading nation that it once was” and at the same time create a situation where the countries around the North Atlantic could continue to remain competitive in an increasingly competitive world. The seeds of an AFTA have already been sown by CETA and by the TTIP negotiations between the EU and the United States. The politics of establishing an AFTA at the present time would be daunting but this is the time for Canada and the UK to take up the challenge.

Armand de Mestral – McGill University
Armand de Mestral, C.M., is Professor Emeritus and Jean Monnet Chair in the Law of International Economic Integration at McGill University’s Faculty of Law in Montreal.He has prepared books, articles and studies in English and French on international trade law and on Canadian comparative and constitutional law and international law. He has served on WTO and NAFTA dispute settlement and arbitration tribunals. He was made Member of the Order of Canada in December 2007. He has has taught constitutional law, law of the sea, public international law, international trade law, international arbitration, and the law of the European Community, and public international air law. His current research interest is the law of international economic integration. In December 2014, he was appointed a Senior Fellow at the Centre for International Governance Innovation (CIGI). In September 2015, he organized a conference with CIGI titled “Investor State Arbitration Between Developed Democracies: A Policy under Challenge.”

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One Comment

The US is abandoning its leadership role… A retreat has been expected since the 1950s, more precisely 1950, when various calculations were made showing US domination of ½ the entire world in trade, productivity, ownership, power of various types — logical, as the only real-winner, perhaps with Canada?, to emerge from the post-war WWII chaos and destruction — we all were grateful the US did not use its position to abuse, and we knew the US would not hold the position forever, if only as others recovered and grew the US dominance would lessen relatively, compared to all the others.

But abandonment? The Multilateral System, born in the ashes of the second World War II, was supposed to develop into a Globalized System, or that was the long-range dream of Monnet and other even more enthusiastic supporters who dreamed his dreams. A United Nations… an International Court… and International Criminal Court… a European Union… a Universal Declaration of Human Rights… After the Terrible Twentieth Century’s violent and destructive initial half these were wonderful dreams.

Now though it seems that folks are tired — in Europe, in Asia, in the US — fatigued by too much dreaming, exhausted from the hard, slogging work of global politics, uninterested any longer in construction but more simply now just in preservation of what-they-got, in preservation of it from imminent destruction in policy-theaters such as the Middle East, and Global Climate Change, and Nuclear Energy, and economic equality.

Certainly in the US… We have been split, now, pretty cleanly, into two halves — the Haves, beneficiaries of the remarkable industrial paradigm change of the Digital Revolution, and the Have-nots of same, those who missed that boat. As remarkable, as the near-balance of that demographic split, is its geographic bifurcation of the nation: the Midwest and the South, the Red States — versus the Coasts, the Blue States — the Trump Election results show that split starkly. The last time the US was this split so clearly over so few issues was just before our Civil War. The US is in danger now, perhaps nearly as much as it was back then, and replacing Trump won’t even address this — the problem is not the leader but the fact that he won, that nearly ½ of the US voted for him.

So Asia turns inward, seeking-out very old geostrategic issues like The Spratlys and the East China Sea where kamikaze winds once protected against invasion — perhaps they can rebuild their old world to strengthen their new. And Europe crumbles, the tentative economic “efficacy” of their postwar efforts never being enough to merit the necessary political “validity” of their postwar world: Kelsen taught previous generations that such systems always would require both, but that lesson was forgotten… And the USA retreats, licking its wounds, not “going gentle into that good night” but simply “going”, now. Will a few bilateral secret-handshakes substitute, for “open-covenants openly-arrived at”? Or is this just nascent isolationism, rearing its very ugly head yet again.

I wish Canada well. I hope Japan nails a good US treaty, too. Maybe Oz and New Zealand will find an Asian market somewhere, somehow. But these seem more like small band-aids, not substantial replacements of the great global adventuring that went on before. The world grows a little darker, I fear. We’ll see when the armed conflicts break out, who really does come to the aid of whom, then: that is when multilateralism really matters, and international trade — war by peaceful means — always has been our preparation for that. I doubt whether a few bilateral trade treaties will do the same. I long for TPP and TPIP, but those great structures have been crushed and sunk beneath the seas now, it seems, by all-sides-involved in the US case: and now that their dreams are gone, as More asks in A Man For All Seasons, “who will stand in the winds that will blow then?”